Author: thebullishbearblogger

Copyright and copyright violation
The material on this website is here to spread awareness about current events in finance and historical events in general and help the society liberate itself from statism and collectivist thinking. In general, you do not need to contact me for permission to reprint portions of the material uploaded on this website. I appreciate, but do not require, attribution. An attribution usually includes the name of the author, the title of the referred article, and the date of uploading the article.
As an individual blogger and financial activist, I do not have the people or resources of a publishing company. Beside my profession as an equity analyst, I have devoted whatever little time that remains to researching current and historical events with the perspective of liberty and respect of commonly understood law – property rights and non-aggression. The urgent need to put information before the public has made it impossible to locate copyright for all material included on this website. Therefore, if you feel that the copyright of any material belongs to you, please contact me at the email/ phone number given below and we shall arrive at an appropriate settlement. Alternatively, in light of the importance of the content, you can contribute to the work on this website by allowing usage of your material. Thank you for your understanding.
I do not claim or assert any right title or interest in any third party communications.
This website is also involved in the transmission, hosting, caching, storage, retrieval and dealing with User Content (third party communications) without review, selection or alteration of their content – for which it is a mere conduit.
The views expressed in any User Content are the views of the individual authors and not those of us unless specified otherwise by us.
I am not responsible for and disclaim all liability in respect of any comments, views or remarks expressed in any User Content.

The Bullish Bear is back to tell the tale of the Indian central bank a year into the arguably illegal sanctioned demonetization program of the Narendra Modi-led BJP government. Fiscal 2016-17 proved to be a watershed year for the R.B.I., which at a stroke shed its image as a holier-than-thou technocratic governance-based institution (Blocking The Economist and BBC from its pressers) and exposed its vulnerability to a sordid moneyed-political campaign of a bullying government (Reforms of an overzealous Modi) through, at the very least, its poor set of financial disclosures, which will be our focus here in this article.

Part 1: The checksum failure discovery

Back in December 2016, the Bullish Bear had discovered a loophole in the disclosures of R.B.I.’s currency management, which is akin to inventory management of a paper manufacturing (banknote printing) firm. Here’s the problem depicted in figures in the tables below:

In a nutshell, a basic checksum on outstanding currency fails – the number of banknotes supplied and disposed off by the central bank can’t account for the net change in the number of the banknotes. To illustrate: on March 31, 2016, instead of the published 90.266 billion banknotes in total, only 88.406 billion could be accounted for by checksum – a difference of 1860 million banknotes or Rs. 977 bn! (We exclude the latest fiscal FY 2016-17 due to the unusual event of demonetization). On March 31, 2015, instead of the published 83.579 billion banknotes in total, a larger figure, 85.845 billion, could be arrived upon by checksum calculation – a difference of 2.27 billion banknotes or Rs. 119 bn. And the internals would make one’s head spin. On March 31, 2016, published volumes of the Rs. 100, Rs. 500 and Rs. 1,000 banknotes exceeded calculations by 1.011 billion, 1.088 billion and 362 million, respectively! On March 31, 2015, published volumes of the Rs. 100, Rs. 500 and Rs. 1,000 banknotes exceeded calculations by -30 million, -448 million and 142 million, respectively. Of course, the problem stretches back to prior years as well.

It has to be noted that the problem isn’t that there is merely a checksum failure. After all, there is such a thing as currency in transit – banknotes in limbo – as they make their way from the printing presses to the currency chests. It is the swing in this figure that really matters. And even that is not evidence, in and of itself, of incompetence at the highest levels in the R.B.I. (a)It is the non-disclosure of the significant swings which leads me to believe that something is amiss about these banknotes in transit, which need to be tracked & accounted for fully in real-time, and (b) The way the formula in the table above has been applied, a positive figure indicates oversupply (Akin to ATM unloading) and a negative figure indicates undersupply (Akin to ATMs withholding cash). While either action is entirely permissible in R.B.I.’s currency supply operations (More in the following section), it is the large swings from undersupply to oversupply & vice-versa that don’t square up & need explanation. For instance, in FY 2012-13, the checksum on Rs. 500 transitioned from+2.40 billion to +186 million, a swing in volume to an oversupply of 2.21 billion. But this constitutes as much as 21.6% of the volume of Rs. 500 banknotes at the beginning of FY2012-13. Simply inexplicable that the currency chests can hold & unload over 1/5th of all of the Rs. 500 banknotes in the country in just one year! Also equally discombobulating is the swing in value terms (Right most column). For instance, in FY 2015-16, ID+CC unloaded Rs. 1.10 trillion of cash in to the public circulation!

Part 2: The R.B.I. calls up the Bullish Bear

On the afternoon of Friday, 22nd Sep, 2017, the Bullish Bear received a call from an official from the R.B.I. (Name & designation withheld), who wished to clarify the discrepancy. He was fairly straightforward about it, saying that the discrepancy is merely the cash withheld in the ID (Issue Department) and the CC (Currency chests). To me, this was merely technical arrangement, and I said as much.

I proceeded to explain my calculations and also gave an additional insight: Around 2013-14, analysts and econometrists were complaining about a perceptible increase in money supply leading to an uptick in inflation. However, at the R.B.I.’s end, at the end of 2013-14, a situation akin to ATM withholding (i.e. ID and CC unable to supply to the public) of banknotes flourishing (2.92 billion deficit in volume from a surplus position of 3.90 billion) coincided with the introduction of the Lead Bank scheme of currency distribution by the R.B.I. (More on this in the following section), which could explain the situation partly.

Similarly, that the Lead Bank scheme was discontinued in FY 2015-16 may explain, at least directionally, the reason that the volume of total banknotes ran into an ATM unloading situation at the end of FY 2015-16 by 4.13 billion notes (4.94% of all banknotes outstanding at the beginning of FY 2015-16) in volume or Rs. 1.10 trillion in value! But there is no tangible data to back up this large swing in banknotes.

I politely conveyed to the official that the institution has to explain the figures and demonstrate with figures that the cash position within the issue department and currency chests account for discrepancy fully. In common parlance, dot one’s I’s and cross one’s T’s. Otherwise we have a square peg in a round hole! The official was courteous, and I thanked him for his call too.

Part 3: Is the non-disclosure of ID+CC data due to the fact that the R.B.I. is technologically challenged?

Looking into the past disclosures, the R.B.I. has not been shy of experimenting with its currency distribution system. This may help explain the wild swings, though only partly. Nonetheless, I do want to point this out as something that has been accounted for while making the headline claims & continuing on the stated big picture theme in this article. Per the R.B.I.’s FY2014-15 annual report, p. 108-109:

“The Lead Bank Scheme for currency management was introduced on a pilot basis in 2013 by identifying one district of each state and assigning the same to a lead bank, which, in turn, is responsible for ensuring that genuine needs of members of the public for clean notes and coins are met through coordination with currency chests and small coin depots situated in that area. The lead bank as a nodal bank for currency management (BCM) attends to issues, such as linkage of non currency chest branches to currency chests, facilitation of supply and issue of banknotes and coins to and from bank branches in the area, prompt routing of diversion requests and redress of public grievances. The nodal BCM undertakes functions relating to spreading awareness/ literacy campaigns on security features of genuine notes and exchange of mutilated notes. After a year of operation, the scheme was reviewed and it was decided to continue it in 2014-15; it is under review for 2015-16.”

The R.B.I.’s FY 2015-16 annual report (p. 90) confirmed that in order to strengthen the distribution of currency by “leveraging technology,” the banknote distribution system was changed to a hub-and-spoke model with mega currency chests (MCCs). Did you read that… “Leveraging technology” at the CCs?

At this point, may I draw the reader’s attention to just show two instance proving that the R.B.I. has been deficient in technology all throughout: (1) Government-owned Security Printing and Minting Corporation of India Ltd (SPMCIL), which supplies ~40% of R.B.I.’s banknotes, admitted in its FY 2014-15 annual report (p. 38) that it first deployed an ERP system (Enterprise Resource Planning) in as late as FY 2014-15! Also that it has “Old machinery & inefficient layouts at some units” on p. 49 of the same report, (2) And in the latest FY 2016-17 annual report itself, on p. 129, the R.B.I. used a “sample” of just 25% of Currency Chests to determine the total number of fake Indian currency notes.

Just to clarify the hypocrisy, at this moment the Indian government and its central bank have been pushing all kinds of demands on the public in the name of digitization and simplification such as the GST, Aadhar, and demonetization. Yet the country’s most respected public organization, the central bank itself, has been dragging its feet on technology & can’t even count properly the banknotes it prints up!

To sum up, it is not just that the swing in the discrepancy ID+CC bucket was large. That it remains undisclosed in the first place and was likely poorly tracked historically – is the nub of the issue

There is plausibly little reason for non-disclosure. Data related to financials of the issue department (ID) (R.B.I.’s accounts for FY 2016-17) is public information and so is the data related to the physical location of the currency chests (CC). And if there are any insecurities about mass looting if the public gets to know how much money there is in which currency chests & that is the reason for non disclosure, it begs the question: how come the banks are so secure with known large deposits of cash at call at all times??

I’m still reeling from the ghastly, even gory revelations around the criminal investigations of Mrs Hillary Clinton & her surrogates, and her “Likely” indictment. Donald Trump’s election is highly probable now: his opponent is being revealed as a compromised candidate with baggage that no country would want to carry at its very helm. [Update: The very next day of writing this article, in a typical commentator’s curse, foot-in-mouth fashion, it broke that the FBI Director, James Comey, has exonerated Hillary Clinton. And although this episode may be over, there are reports that she may still be involved in an investigation of the Clinton Foundation. Nevertheless, the Bullish Bear still holds up the argument that evidence of rampant corruption should demolish hopes of a Clinton presidency in an honestly cast ballot on 8th of November, 2016.]

Zero Hedge: “Statistically, the market has an 86.4% success rate in forecasting the election”

For those not very familiar with American politics, Mr Trump stands in the anti-establishment corner of the ring, while Mrs Clinton stands in the establishment corner. This really is BREXIT-II, only a lot bigger! Mr Trump, a populist, nationalist representative is being opposed by democrats, republicans, rich elites, Wall Street and the mainstream media. While Mrs Clinton, in a flagging, scandal hit campaign, is running out of ammunition and running into trouble. Deep, deep trouble.

It honestly feels as if pitchfork villagers and stone throwers, in the form of one-page news aggregators (Drudge), old-fashioned pub-brawling loudmouths (Alex Jones) and computer geeks with no outside life (Julian Assange of WikiLeaks) are attempting to bring down the giant David. With a little help from Sherlock Holmes (In the form of sleuths, FBI, NYPD), I might add.

Structural change are expected “bigly” as an establishment-run White House has been extremely susceptible to corporate lobbying & cronyism, as is being revealed through WikiLeaks, FBI and other investigations on a daily basis. And whilst the short-term impact could be very sharp and widespread, the long-term advantages of an establishment-free administration are many, and indeed necessary to stop the carnage in the Middle East, rebuild & heal the global economy.

These are historic, seismic developments, and a new regime can bring changes in all directions of biblical proportion.

To be sure, it being all of four days before the voting day, the Bullish Bear is merely speculating that these sweeping structural changes Can be carried out, which has a question mark to it: Mr Trump’s Republican Party is fighting a close race to retain control of the House of Representatives and the Senate. But we can pontificate over political developments later. Let’s see what structural changes lie in store for American and world industry based on economic policy of The Donald.

Trump is a wildcard in this area, and has fired a brief innuendo against “evil Monsanto” in the past. What this means for Bayer-Monsanto or the Monsanto Protection Act, we cannot know. But Mr Trump has been quoted decrying centralized regulation of the agricultural industry saying, “The agriculture industry should be free to seek its best solutions through the market system.” He has targeted “The FDA food police,” calling for the elimination of food-safety regulations, which is a positive development.

Lesser clarity is available on the issue of labeling requirements for GMO foods, which is a very important issue, as 64 countries around the world require labeling of GMOs.

However, there is more clarity on the front of the Environmental Protection Agency, EPA, for which he has picked a known climate skeptic, Myron Ebell. As a climate skeptic himself, Mr Trump wants to transition the agency to one with a drastically different agenda. The Bullish Bear welcomes this as perhaps his most clearly radical and polarizing reform.

Cable TV industry <0, +2>

Fueled by intense bias against Mr Trump, it will not be surprising that he would consider a TV station startup. As an opinion piece in MarketWatch noted, “Blatant bias against Trump may hasten the end of mainstream media.”

It was reported by the Financial Times of London last month that Jared Kushner, Mr Trump’s son-in-law, approached dealmakers informally with a view to setup a Trump television network after the presidential elections.
Look for a new momentum and spotlight on Mrs Clinton’s “Alt-right media”: Breitbart, WND, Drudge Report, and the over-the-top raging bull-horn, Infowars.com.

Healthcare <-2, +4>

Mr Trump has vowed to repeal the Affordable Care Act (ACA), popularly known as Obamacare. The Act has gained notoriety of late as premiums are soaring and medical practitioners are discontent. Mr Trump’s healthcare plan is to break up healthcare insurance monopolies, allowing vendors to compete and thus lowering prices for consumers. He wants to allow tax deduction for insurance premium payments.

Mr Trump’s election could mean a negative impact on healthcare stocks, which have corrected ahead of broader indices of late, following rising premiums and the pulling out of some large insurance companies. Many healthcare companies such as HCA and Universal Health Services had benefited tremendously from Obamacare.

Related to this area, Mr Trump plans to allow eligible veterans to gain access to private healthcare after the unraveling of massive corruption at the Department of Veteran Affairs hospitals. The plan incorporates what seems to be a fair short-term remedial measure, but lacks clarity on means of funding.

Manufacturing <+2, -1>

Mr Trump is mostly rhetoric on the topic of manufacturing, claiming that he would bring back the jobs which were drained from the United States due to “Terrible” trade deals such as NAFTA, trying his best to mirror his counterpart from 23 years ago, Ross Perot. He wants American Companies to relocate their manufacturing bases at home, and has offered little by way of concrete steps except that corporate tax rates will be cut to 15% from existing rate of 33%, which has to be granted as a significant step. Are litigation challenges likely for Companies such as Ford who have built plants outside United States? I think not so, but his rhetoric can have a negative impact on the business-friendliness of investment conditions.

Gun manufacturers <0, +4>

As The UK Independent reported, fear of Mrs Clinton has sent gun sales and manufacturer profits soaring. So, the appointment of National Rifle Association-endorsed Donald Trump to the White House may be a short-term negative for Companies such as Sturm Ruger, Cabelas and Smith & Wesson and Visa Outdoor, unless accompanied by civil agitation from allegedly George Soros-backed arsonist groups. In the long-run, the gun manufacturing industry, hammered with regulations, will benefit from a less intrusive administration. Lesser hostility towards 3D-printed guns can dent the prices of guns. However, this being a technological shift, will be a healthy & organic development.

Weapons manufacturer industry <-3, -5>

The military-industrial complex, as President Dwight D. Eisenhower warned, has potential for the “disastrous rise of misplaced power.” An arguably relatively less-hawkish Trump administration will force the weapons manufacturer industry to scale down. There is potential for litigation challenges as there have been many allegations from the anti-establishment camp, that Mr Barrack Hussein Obama has been arming Al-Qaeda/ ISIS! There is also spooky evidence of images of hundreds of new-looking Toyota pickups and land cruisers with ISIS. How did that happen?!

Despite extremely accommodative interest rates, United States’ roughly half-a-trillion dollar a year trade deficits continue. With the promise of further accommodation in fiscal policy (Lower taxes, in particular), a significant increase in America’s enormous debt burden could be the catalyst to devalue the dollar, and revalue Gold.

A sharp, short-term impact from a debt-interest rate reset favors traditional hard asset-backed commodities, prime of them being precious metals, which has suffered a setback between 2013 and 2015.

Note: In the structural impact score of +3, a hawkish Chairman after Janet Yellen’s term ends in February 2018 is factored in, else a score of +5 would have been appropriate!

Mr Trump is focused on domestic production of oil and gas, and wants to “rescind all job-destroying Obama executive actions,” “eliminate all barriers to responsible energy production” and “unleashing” untapped oil and natural gas reserves. Again, rhetorically positive, surrounded by the right talent pool, but whether this can actually be realized remains to be seen. I forecast that there can be sharp movement in Oil prices, but this will be due to a secondary impact: a devaluation in the Dollar and a deficit crisis could be the trigger first.

Where Mr Trump’s policies will have an energy-related impact is for Coal-based energy producers, leaving solar & wind energy producers in a much tougher fight for market share. Mr Trump has vowed to bring “Coal jobs back,” in an industry hamstrung by overt regulations.

Much as this is a political overtone & a vote-winner, the Bullish Bear is in complete agreement; the end of anti-Coal regulations is a must: Coal is a plentiful, movable, low-cost energy resource, increasingly cleanly produced, and in the face of soaring energy prices in the West, will be a much-needed relief to industrial and residential consumption (Various advantages of Coal can be sourced here). In the developing world, these arguments become only stronger. And a historical fact to counter all environment-related concerns is that, since the 1920s, weather-related deaths have dropped by a 98%! Let that sink in a bit.

Both candidates have promised infrastructure spending, but the anti-establishment plan of Donald Trump is twice as aggressive as Mrs Clinton’s.

Donald Trump has unveiled plans to spend $1 Trillion over the next ten years, but here’s the good part, with very limited government participation. The plan was developed by Trump economic advisors Peter Navarro and Wilbur Ross.

As with many other pieces of his plan, there isn’t much clarity and interest rate is a key dependent variable – big infrastructure spending would naturally entail heavy borrowing.

Financial & Allied Services <-4, 0>

Financial Services, including broking, investment banking, the pensions & mutual funds industry could prosper, but only after a sharp downturn. The consulting and legal professions will bounce back too in the post-reset era, but there will very likely be a sharp reset first!

The stock market has had it too easy for too long – easy money and more easy money has meant a dreamy run for stocks and bonds despite the weakest economic recovery ever on record. There has to be a reset!

This will undoubtedly be the most radical and clear target of the anti-establishment forces. Much debate surrounds a possible reinstatement of Glass-Steagall in this area, but that is pointless exercise.

Litigationally, a stricter Department of Justice and S.E.C. could unravel the already scandal-hit, tainted industry. Billions of dollars’ worth fines, public ridicule and anger over the past two decades are just the tip of the iceberg: Leading banks have, in fact, had an easy ride after being caught red-handed scamming pensions, rigging financial markets, interfering with politics (E.g. literally writing the laws of the country) and money-laundering to benefit foreign governments, drug cartels & even terrorists… Allegedly (Safe to use this term, I gather)!

And that’s not all. Donald Trump has, on multiple occasions, riled against the Fed for being politically allied with the Democratic Party, and for being too easy with monetary policy. A charge that, of course, pre-dates current Fed Chair Janet Yellen’s term.

Against a backdrop of rising concerns over NPAs in the banking system, it was reported that Air India was looking at the possibility of availing a new scheme, the Scheme for Sustainable Structuring of Stressed Assets (S4A), to rejig debt to the tune of a minimum of Rs 100 Bn. Since 2012, the airline has been on a life support with a Rs 300 Bn bailout package from the government, spread over ten years. In fact, this may be one of the biggest sums that LIC has ever loaned out till date: this new loan to Air India of Rs 100 Bn (If that number is correct), will grow its loan book by an enormous 9.26%.

Who reported this? A Secret deal?Was it leaked?

Since, at the time of writing, Air India has made available annual reports only until FY 2013-14, all the financial figures and plans of rejig coming out in the newspapers, if true, are very likely being leaked from Air India/ Civil Aviation Ministry itself, and being dealings in material non-public information, this constitutes a situation of non-uniform dissemination of sensitive information, and possible violation of securities law.

Indeed, the public sector bank index was up by a chunky 1.5% today, being the first day since the story broke, with two of the three stocks mentioned in the story (Bank of India, Bank of Baroda) up over a per cent and the third stock (Punjab National Bank) within 3% of its 52-week high.

“LIC is a captive source of funds for the government. They have misused the status of LIC to misappropriate policyholders’ money and brought it to the government’s coffers through the ONGC disinvestment.”

Now that his party is engaged in the same treasonous act, in his own words, a “daylight robbery”, I’m sure he will stand up for the public and do everything in his power to stop this transaction.

Fat chance!

A case of honest kleptocracy

But the Bullish Bear wouldn’t write this if there wasn’t a silver lining to this all. There is an honest side to this, y’kno.

This bailout has proved that the government can openly rob the public of its money, via the LIC, to bail out bankrupt Companies.

Such instances of naked cronyism can at least serve to warn the public that their savings and insurance are at risk. The Life Insurance Corporation of India is not a safe house, nor are any of these banks offering 4-7% return on savings, making loans to extremely indebted Companies while maintaining tier-I ratios of just 10%.

As mentioned previously, the Bullish Bear is an ardent fan of free markets and open competition. Yet, I have sympathy with Air India’s Chairman & Managing Director, Ashwani Lohani. Coming from the head of a public sector enterprise, these are astonishing words, admitting that a public sector entity does not really care about the delivery of its services. Although he does shy away from writing the public sector off completely, the Bullish Bear believes that he is headed in the right direction!

“Often my airline is questioned on its inability to match the private sector on various operating parameters, and this is unfortunately always done without due appreciation of the fundamental reality that there is no level-playing field… A course correction is the need of the hour, for contrary to what many may think, the public sector has still not lost its relevance in entirety… Unless and until we all, and that includes the mighty government machinery, start believing in the supremacy of deliverance over everything else, such dilemmas would always continue.”

The Samarco dam disaster in Brazil continued to take its toll on BHP with the pending exit of Chairman Jac Nasser now confirmed. The disaster took place on November 5th, 2015, killing 19 people, and has been well documented here for its initial impact, here where the flooded vicinities are shown, and here documenting how protestors and representatives of victims of BHP Billiton’s mining projects not just in Brazil, but also in Indonesia and Columbia, planned to demonstrate outside the Company’s AGM in London.

The Bullish Bear caught up with the 2016 BHP Billiton AGM, and can confirm that representatives from Brazil and Indonesia were there and questioned the management incisively, to which the management replied with little more than platitudes and steps already put in place.

Some background: Samarco (Brazil) iron ore asset

The Samarco Mineração S.A., which operates the Samarco iron ore operation in Brazil, is held 50% each by BHP Billiton Brasil and Vale S.A. As a result of the tragic dam failure, operations at Samarco have been suspended, with no indication of reopening soon. Samarco’s main product was iron ore pellets. Prior to the suspension of operations, the extraction and beneficiation of iron ore were conducted at the Germano facilities in the municipalities of Mariana and Ouro Preto. In FY2016, BHP’s share of production was 5.2 MT of pellets (4% of Iron Ore production in revenue terms).

Impact and management steps

As at June 30th, 2016, BHP Billiton’s contingent liabilities registered a relatively small uptick from US$ 3.263 Bn a year ago to US$3.442 Bn, a figure which precludes “A number of matters, for which it is not possible at this time to provide a range of possible outcomes or a reliable estimate of potential future exposures.” Hmmm.. the potential potentialities!

Equally noteworthy is that, despite insurance policies in place with Brazilian and international insurers, no insurance receivable has been recognized by Samarco for recoveries yet. Related to Samarco, BHP Billiton is externally insured for up to $360 MM, a figure which is dwarfed by the claims as below.

As at June 30th, 2016, BHP Billiton Brasil has identified contingent liabilities arising as a consequence of the Samarco dam failure as follows: (1) P&L: impairment charge of US$525 million, (2) Balance Sheet: Losses and provisions totaling US$ 1.2 Bn, (3) Environment and socio-economic remediation: An agreement with various authorities and partners to set up a Foundation, with funds of $ 134 MM initially (4) Legal: Various law suits including a claim brought by the Federal Public Prosecution Office on 3 May 2016, seeking approximately $48 Bn, (5) Commitment: a short-term facility to Samarco of up to $116 MM to carry out remediation and stabilization work.

These heady, heavy numbers aside, the management did take many steps, however. For example, (1) it took part in over 500 community meetings over the last year, (2) 41 programs were set up involving Samarco, BHP, Vale S. A. and the Brazilian government, to focus on and rehabilitate social, economic and environmental impact of the accident, (3) A governance review of non-operating minerals joint ventures has been undertaken, (4) An expert panel’s investigative findings were released in August ’16 and also shared with other resource Companies, and (5) A global centralized dam management function was set up, with global tailings standards for design construction, maintenance of tailings and more frequent usage of independent safety reviews.

Another change was made after the December 2015 results: shareholder dividends were set at a minimum of 50% of underlying attributable profit, against a progressive dividend policy that sought to increase steadily or at least maintain half yearly dividends.

As for the earnings of CEO Andrew Mackenzie, they fell to half as he did not receive any performance-related pay in FY2016 – short-term and long-term incentives were both zero. This was notably lauded by a keen attendee at the AGM, I noticed.

The failure of the tailings dam was blamed on construction defects in the base drain, while numerous warnings went unheeded

A Fundão Tailings Dam Review Panel was constituted by Cleary Gottlieb Steen & Hamilton LLP, which was retained jointly by Samarco Mineração S.A. and its shareholders, BHP Billiton Brasil Ltd. and Vale S.A., to conduct an investigation to determine the immediate cause of the November 5, 2015 Fundão tailings dam failure.

As I read the disclaimer on the website page here it clearly indicated that this was going to be less a fault-finding mission and more a technical, causation-investigative mission.

[A side note on tailings dam: A tailings dam in a cost effective structure to hold back the water from the mining area, contain the ground-rock tailings from the ore-milling and separation process and recycle the water to be reused in processing.]

It was originally planned to deposit sands behind a compacted earthfill Starter Dam, then raise it by the upstream method to increase progressively its capacity. To preserve the freedraining characteristics of the sands, a 200 m beach width was required to prevent water-borne slimes from being deposited near the dam crest where they would impede drainage.

An incident in 2009, shortly after the Starter Dam was completed, damaged the dam so badly that the original concept could no longer be implemented. This was “due to construction defects in the base drain.” A revised design followed in which more widespread saturation was allowed and accepted, increasing the extent of saturation introduced, which increased the potential for sand liquefaction. Sand liquefaction is a process whereby the material loses nearly all of its strength and flows as a fluid, which is what happened on the fateful afternoon of Thursday, November 5th, 2015, following the likely triggering event of three minor earthquakes in the region.

The foundation was laid, but the summary findings went on to highlight multiple indications and warning signs: (1) In 2011-12, “The 200 m beach width criterion was often not met,” (2) “In late 2012 when a large concrete conduit beneath… was found to be structurally deficient,” (3) During 2013, “Surface seepage began to appear on the left abutment setback at various elevations and times,” (4) By August 2014, “The replacement blanket drain intended to control this saturation reached its maximum capacity”, the saturated mass of tailings having grown meanwhile.

Alas, this narrative points to a pattern of operational negligence, which is what is making the victims, regulators and other stakeholders take action.

Returning to the goings on at the AGM, something else also caught my attention. BHP added this to its Charter (A one page leaflet with a few punchy dictums):

“We are successful when… Our teams are inclusive and diverse.”

Tacit admission of deficient decision-making?

By including the clause of inclusion and diversity in the Company’s Charter, we have a window into the minds of the management, into how they view a possible resolution to the mistakes made in this episode.

Reviewing the panel’s findings, it is apparent that despite many warnings, the management of Samarco S.A. continued its operations. Is the new mantra being introduced to improve this facet, and therefore, given the timing of this, is it a tacit admission that poor decision-making while reviewing key incidents through five years of the operation of the tailings dam at Fundão, was the most important cause of its failure?

The Bullish Bear tends to indeed think so.

Unlike The Guardian, BBC, the Financial Times, and many others, all of who suggest that the diversity program is for the sake of it or to improve performance: there is more to it than that. It is for a far more precise, strategic reason – to improve decision-making in high-pressure, high-stakes business scenarios.

Public ownership of any good or service is fraught with inefficiency and lack of accountability. The Keynesian explanation in the case of, say a manufactured toy, is that a monopoly (i.e. in the classical sense, government ownership) always produces less of a good or service at a higher cost. But Keynesians rebuke strongly any idea of non-public ownership of “public goods”, such as radio spectrum. Coming from a libertarian point of view, the Bullish Bear professes private ownership even for a public good or service, say military defense, and strongly refutes the need for government ownership. And how come the government came to own radiowaves – this valuable resource – in the first place? It wrote itself a title. Or probably did not bother to do even that!

Globally, low spectrum utilization has been observed and documented. A study in 2003 found that only 19% of frequency space in Washington, DC was used in peak times. Clearly, radiowaves are more abundant and hence less valuable than apparent at first. But we can hardly rely on the public sector to resolve this issue – the Indian Spectrum Management Committee (GOT-IT, 1999) had found that the armed forces had “squatted” on the radio frequencies they occupied while using very little of them (in the words of Ashok Desai, whose critical insights we rely on very much, and whose work we highlight later on).

The 2016 spectrum auction, which lasted for a workweek, enabled the government to sell 965 MHz of spectrum for a total sum of Rs 657.9 Bn or $9.85 Bn. This is equivalent to over 2.5 months of revenue of the largest private sector Company in India, Reliance Industries! Yet, this was an underwhelming yield for the government, because spectrum supply was plentiful, there was less need for renewals and also because the government shot itself in the foot with sky-high reserve prices for the most lucrative segments of spectrum, despite financially stresses of participants.

However, in this blogpost, the Bullish Bear will dwell more on the historic development of the telecom industry’s auctions and take a look at the harsh impact of the government’s severe interventions into what should have been the free market operation of this industry.

Competitive nature of the industry shaped by part-liberalization in the 1990s, giving relief from public sector stranglehold

The first glimpses of liberalization in the mid-1990s led to private sector participation being allowed in basic services, and growth in wireline services picked up. The Indian Telecommunication industry tried to embrace a more modern image with the National Telecom Policy of 1999, allowing private sector players to break through the monopoly of DoT little-by-little.

The short history of India’s Telecommunication Industry is, as laid out in this brilliant publication by Mr Ashok Desai, a tale of how entrepreneurs climbed their way out of the government’s impossibly high license fees by getting foreign partners and public sector banks themselves involved in funding telecom operations!

In the period before the liberalization began that we can get a glimpse of how state monopoly was playing a balancing act between hiding its laziness on the one hand, thus keeping at bay any deregulations and new entrants and yet, on the other hand, showing a substantial-enough pipeline of pending orders & risking revealing its laziness, thus staking a claim on additional funds from the government. We can post this revealing table below, in which we can see that despite substantial backlog of orders worth 25% of installed lines in 1982, growth in installed lines barely broke out into the teens in 1992! All this while, the waiting list was kept hovering at around 4 years!

Indeed, telephones were classified as a luxury item and given low priority in India’s socialistic five year plans. “The telephone system began to expand rapidly only in the late 1980s, when the ITI-Alcatel factory delivered switches in large enough volumes,” Mr Desai sighs.

How come the government owns the air above us?

Socialist India gave monopoly power to the Department of Post and Telegraphs, until 1985, when Mahanagar Telephone Nigam Limited (MTNL) and Videsh Sanchar Nigam Limited (VSNL) were created as public sector undertakings under the Department of Telecommunications (DoT). It is through this entity, the DoT, that the law still bestows an exclusive privilege on the Government to provide telecommunications services. The DoT issues various notifications imposing onerous obligations and restrictions on players in the industry.

Spectrum value is artificially high as the public ownership is creating artificial scarcity

“Is the radio spectrum a unique resource that belongs to the public, or can it be privately owned like any other good or service? Most people assume that public ownership is axiomatic—a starting point rather than the historical consequence of special interests pretending to misunderstand economics. This is wholly incorrect… Full-scale privatization of this resource is essential.” – B. K. Marcus, Mises Daily

It is worth our time to pause and evaluate this situation. At the moment, the government is holding back all the spectrum and renewing licenses to operate on it via the auction method. Some spectrum is in the low frequency ranges (Which have better ranging abilities), whereas some are in the high frequency ranges (Which can carry higher bit rates). But the government’s reclusive actions are creating artificial scarcity, particularly for the spectrum being used currently – as the government will obviously not auction spectrum that is Not in use currently in the telecom industry. Thus, not only is existing spectrum valued artificially highly, but there exists a systemic latency to discourage switching to higher spectra. Thus, players, particularly the incumbents, who have large amounts of capital and resources at their command, are less willing than they would otherwise be, to trial newer technologies at higher bit rates, thus retarding the speed of technological development.

Clearly, the government is meddling in the formation of lower prices at the consumer level both directly (through high taxes and license fees) and indirectly (through deceleration of technological innovation by encouraging extant spectrum usage).

Government’s Telecom booty: High spectrum fees accounts for all of the debt accumulated in recent years

An analysis of the government’s revenue from the telecom industry in the form of corporate taxes, licenses fees, spectrum usage charges and spectrum auction revenue suggests that the government is running its own parallel Company alongside: about the size of Idea Cellular, the #3 telecom company in India by market share. For every Rs 100 of honest revenue earned by the top-4 listed Companies, the government “earns” Rs 36, Rs 17.5 of which comes from License Fee (LF) and Spectrum Usage Charges (SUC), Rs 12.5 from spectrum auctions and Rs 5.5 from corporate taxes.

And it doesn’t stop there. The Bullish Bear estimates that the incremental indebtedness brought to bear upon the Companies brings the government an additional 0.5% through dividends from publicly owned banks (We have to assume a share of 50% to PSU banks, as break up of this data is not provided by the Companies nor by the banks). This equates to a cool Rs 4.4 Bn in FY16.

According to these estimates and adjusting for inflation, the Indian government has amassed nearly Rs 2,300 per man, woman & child in India since 2010, compared to the monthly income per capita for an average Indian of Rs 7,774. Were it not for spectrum auctions raking in Rs 85,000 crore since 2010 ($12.9 Bn at today’s exchange rate), the telecom industry, the top-4 listed players of which have accumulated total debt of Rs 1.26 Tn (57% of which have accumulated since 2010), would be almost certainly debt-free by now.

For investors, the golden period seems to have come to an end with the industry in a mature phase and the companies in serious financial stress.

Telecom companies, even including tower Companies, which are much more profitable (for now), have underperformed almost all prominent sectoral indices over the last three years. Despite exponential growth in data, overall growth seems to be slowing and it remains to be seen how the $20 Bn new entrant, Reliance Jio, impacts the structure of the industry.

From the perspective of corporations, by logical and empirical evidence, we have seen how onerous public sector ownership and regulations have hampered the development of the telecom industry. India’s Telecommunication regulatory bodies: DoT, TRAI and COAI have become mightily powerful and can potentially become broad-based regulators and censors as well, if we were to look at the example of the United States: Marcus educates us as to how the regulator there, the FCC, has become “the largest censorship body in the world.”

But if we were to ask “Cui bono?” Not only has the government benefited, but the regulated industry itself being cartelized, its members have benefited as well. They pull together when in need to erect artificial barriers to entry (say a minimum paid-in capital or unbundling free internet messengers) and push together when defending from higher tariffs.

In summary, the government, the banks, the regulators and bureaucrats, foreign & domestic entrepreneurs are all in the gravy train, and the investors and public treasury have to protect their invested capital (in telecom companies and in the banks) & bear the risks (of investments failing). Investors blame the Companies, the Companies blame regulations and high interest rates, the regulators want revenue to shore up government revenue and the government cannot do without revenue, can it? All this while, the elephant in the living room, namely the unethical public ownership of radio spectrum, lives happily ever after!

Deepening the erosion of civil liberties, subsidies of LPG now cannot be received unless you sign up into the club of Aadhaar. A firm warning was fired to the some 20% subscribers who have not yet given in to enrolling with UIDAI’s database by the Oil Ministry. Chief Executive of the UIDAI, Mr A. B. Pandey cited Section 7 of the Aadhaar Act to rifle home the point that Aadhaar numbers are mandatory for the receipt of subsidies that fall under the Consolidated fund of India.

The Bullish Bear has earlier neurotically documented the hidden abuses of the UIDAI system in this blog at Liberty Here and Now. Here, I document how, contrary to the claims by politicians, the UIDAI system is extremely costly, insecure, exclusionary and is basically meant to control our existence and identity. On 22nd April, 2013, a Parliamentary panel headed by former Finance Minister Yashwant Sinha, who himself was a prominent member of today’s ruling party, had stated that the UIDAI was “discharging its functions without any legal basis.”

Murky legalization

Since then, the same party has come into power, but instead of terminating the program, continued throwing money into the system, making a terribly awkward push for its legalization via the route of the money bill (which avoids formal scrutiny of the Upper House) as late as March of 2016! This only proved how dubious the whole system was – that it had to be dressed up as a financial matter of transfer payments – whatever happened to all the social motives! But let’s leave aside the question of whether LPG subsidies make economic sense, and focus solely on the technical aspects of the use of Aadhaar by the government.

A report filed by the Mint newspaper also suggested that the Aadhaar number could be mandated for use in the PDS, MNREGA and pension schemes.

“There can’t be a situation where you say, ‘I don’t want to enroll for Aadhaar’”

This latest transgression by the government, Center or State is far from the first. Readily searchable, I document 6 such instances over the past month alone:

#1 Maharashtra’s state level education boards mandating Aadhaar card for registration in examinations and disbursal of scholarships (Times of India, Oct 6, 2016). This was the second time the Maharashtra government was caught openly flouting orders issued by the apex court. In April, 2015, the same government had issued a resolution for making Aadhaar mandatory for all students up to 14 years of age in the state and connect it with their school admission number (Moneylife, Oct 5, 2016)

#2 The Wrestling Federation of India requires that wrestlers have an Aadhaar card to participate in national level tournaments (The Indian Express, Sep 27, 2016)

#3 Central Board of Secondary Education (CBSE) schools not only forcing students to provide the UID number, but also arranging camps for enrolment of Aadhaar for those who do not have the UID number (Moneylife, Sep 27, 2016)

#4 A letter on July 14, 2016, addressed by the Center to States and Union Territories demanding that Aadhaar card be made mandatory for students for applying for pre-matric, post-matric and merit-cum-means scholarship schemes. (The Hindu, Sep 26, 2016)

#5 The UIDAI instructed all the Union and State Ministries that the Aadhar card will be mandatory for all services, benefits, and subsidies funded from the Consolidated Fund of India. He was quoted as saying, “There can’t be a situation where you say, ‘I don’t want to enroll for Aadhaar.’” (Inc42, Sep 20, 2016)

#6 Indian Railway Catering and Tourism Corporation (IRCTC) Chairman and Managing Director A.K. Manocha: Senior citizens will be unable to get ticket concessions without Aadhaar from December, 2016 (The Hindu, September 12, 2016)

Aadhaar [Hindi “आधार”] means “base” or a “foundation”. So far, the UIDAI’s Aadhaar system has been destroying the foundation of citizen’s privacy and the bureaucratic class has been desperately ramming home this database shamelessly and baselessly.

The Bullish Bear is back with a few delectable insights into yesterday’s rate cut by the Reserve Bank of India, a relatively unexpected one, albeit a sixth cut in just under 2 years. A basic survey of newspapers after yesterday’s events will reveal that many analysts seem convinced that Government has now sidelined its CPI target in coming years of 4%. Two quick deductions: (1) Interest rates are decidedly headed in one direction only: and that’s down. For now. And (2) Monetary Policy Committee (MPC) or not, Urjit Patel is there to command the ship as per the directions of the BJP-led government. I present my case here in support of such a growing belief that Urjit Patel is a dove trapped in hawk’s clothing under the previous governor’s regime.

#1 Recent data releases were mixed and technically, did not merit a reaction

A cut in interest rates seems to be the obvious course of action from the statistic of Bank Credit growth FYTD of 0.8% significantly lagging Bank Deposits growth of 5.0%. However, sound economics will deduce, infact, a necessity to raise interest rates based on this data point! More money growth in the system is a warning sign of excess money creation, and a cut in interest rates will only add fuel to the fire. In any case, even if we were to analyze the conventional view of cutting interest rates, rate hike transmission was the key intermediate step to resolve: Over the last 150 bp of rate cuts, only 70bp have been passed on.

Comparing India’s positioning to BRICS nations, for the large part, India has favorable growth statistic (9th highest in the world), but is at risk from rising prices. Upside risks to CPI include (1) rising crude prices, (2) upcoming strong quarter for Gold, which may strain deficits & the Rupee and (3) government largess in wages and compensation fueling consumption demand. And although RBI’s release cited moderating food prices as a relief, it should be noted that the food price inflation index is first of all, volatile, and second of all, at a level of 8.23% in July, still very high!

#2 Ex-ante polls were markedly more dovish under the new governor

Since Urjit Patel’s appointment as governor on August 20th, analyst polls on rate cut swung significantly to a more dovish stance (From under 12% expecting a rate cut in deposed governor Raghuram Rajan’s last meeting on August 9th to over 40% ahead of October 4th meeting chaired for the first time by Mr Patel). Reuters on 30th September stated that “Several analysts in the poll said they expect him and the newly-formed Reserve Bank of India Monetary Policy Committee to follow a more dovish path than his predecessor.” If analysts are to be considered “informed,” then this large movement in the informed consensus on what’s coming held valuable information for the market.

#3 Urjit Patel was installed by a government crying out for lower interest rates

Numerous instances have been reported documenting politicians criticizing Raghuram Rajan’s monetary policies. Dovish Government stalwarts such as Rajya Sabha MP Subramianian Swamy openly backed the instalment of Urjit Patel, who thought it was “idiotic” to believe that Patel will be as hawkish as deposed RBI Governor Raghuram Rajan. Mr Patel may have some wrongful history as well: it was reported that Patel was involved at the highest levels with scamster Jignesh Shah, according to a report by India Samvad.

And lest we forget the basics of how the central bank operates in India. Per the Reserve Bank of India Act, 1934 (Updated January, 2013): (1) Its governors are appointed or nominated by the central government, (2) the Government of India also dictates the appointment/ nomination of all directors to RBI’s board of directors, (3) the RBI was nationalized on 1 January, 1949, and is fully owned by the Government of India.

In a week well-marked by Madam Secretary, Hillary Clinton’s pneumonic seizures catching the political world’s attention, the Fed’s tarzans swung from tree-to-tree, roiling the capital markets. What’s lesser known, however, is that just as Hillary Clinton’s unease was really not pneumonia, the Fed’s swinging stance on raising interest rates was really part of a hoax. Make no mistake – the Federal Reserve is masquerading as a hawk deep inside dove territory, as it tries to carefully crawl its way out into the open without being preyed upon.

The Fed seemed to test the waters before muddying them – a predetermined move – very similar to the events preceding the rate hike in December 2015. Peter Schiff calls it “sending out a trial balloon” of rate hike talk before finalizing what to do. “Quantitative talking,” “Open mouth operations,” just to borrow a couple more phrases from the real Dr Doom!

Is it all just a show?

The representatives of the Federal Reserve – either from the member banks or from the Federal Open Market Committee (FOMC) – are rolled out to talk to the media, they take a strong position in front of the market (Of hiking rates in this instance) and then they gauge the feedback. Based upon the reaction on (Which was extremely negative on Friday, 9th September), the Fed can position its speakers to go whichever way it desired – raise interest rates, maintain them or cut them (Maintain them, in this case).

To start off, in the week prior, San Francisco Fed President John Williams, a known centrist, gave a rather hawkish speech, which was in the face of some fairly bearish data in August just 12 hours earlier (Aug Fed Labor Market Conditions Index (A: -0.7, P: 1.0, F: 1.5), Aug ISM Non-Manufacturing PMI (A: 51.4, P: 55.5, E: 55.0)). The markets declined somewhat: over the following two days, the S&P lost 0.2%, and the US Dollar gained the same amount. And then, as if to compound the error, Boston Fed President, Eric Rosengren, a known dove, came in and gave an even more hawkish speech on Friday morning. By the end of Friday, despite the best efforts of Daniel Tarullo to insert a dovish narrative, Crude Oil lost 3.2%, the Dollar index climbed 0.3% and the S&P 500 lost 2.5%!

The adverse reaction forced the Fed’s hand on Monday, being the last day before a blackout period on public comments related to monetary policy ahead of the FOMC meeting next week, and dovish speeches spewed forth from all directions.

Accordingly, the 3 main speakers on Monday, 12th September, were (1) A centrist – Atlanta Fed President & CEO, Dennis Lockhart, (2) A dove, Fed Governor Lael Brainard and (3) Lesser known, but evidently a hawk, Minnesota President Neel Kashkari. And they all dove for cover, desperate to stay the course of easing.

Particularly surprising was Minnesota President Neel Kashkari’s ultra-dovish interview on CNBC. Also, albeit that the centrist Atlanta Fed President & CEO, Dennis Lockhart’s speech was only mildly dovish, he excused himself from offering an opinion on what will likely be done in future Fed meetings, citing the fact that “Financial markets seem to be very sensitive to remarks of Fed speakers.” He conveniently proceeded to proffer a number of forecasts and estimates in his speech of nearly 1,900 words, offering a wide range of opinions.

The Fed’s political maneuvering is not in good faith

The Fed’s behavior has been as deplorable as Hillary Clinton’s pneumonic cover up of her health issues, which could disqualify her from running for the highest office. No discerning student of capital markets should take the Fed seriously. The Fed was never seriously contemplating raising interest rates with the integrity of a rigorous regulator, else interest rates would not be as low as they are in the first place.

The bullish bear is back with a look at the Indian Goods and Services Tax (GST) legislation. With the observation that procedural simplification in the taxation system without taking a sledgehammer to taxation infrastructure is merely window dressing, concern is that, just like the enthusiasm surrounding the reduction in corporate tax rates (revenue neutral and phased in slowly) has fizzled out, the conundrum of the appease-all democratic mujra surrounding the Modi government’s trophy legislation, the GST Bill, may defeat its purpose entirely.

What’s the claim?

According to Finance Minister Arun Jaitley, the GST reform can boost economic growth by as much as 2 percentage points by way of introducing more efficiency in the movement of goods and services across state boundaries. It is also claimed that Automotive OEMs and logistics sector companies stand to gain as it may become easier to transport goods across India. However, the stock market drew mixed reactions, profit-taking, and amidst the disclosure of monthly volume numbers, the impact of the long-pending indirect tax reform on automotive stocks was unclear.

What is the process from here on?

The 122nd Constitutional amendment, having been passed by the Upper House (Rajya Sabha) with certain amendments, will have to be ratified once again by the Lower House (Lok Sabha), which should be a formality given the control of the House by the ruling party. The bill will then proceed to the state-level, where it will have to be approved by at least half of the states (simple majority). A detailed tax structure will then be appended and the legislation will once again go through the ratification process in the two Houses of the Parliament, followed by a presidential assent.

The earliest implementation of the GST will be by 1st of April, 2017 – and that’s assuming there are no technical hiccups on the technology side (The GST Network Company awarded a contract to develop & implement its system as late as November 2015 to Infosys.)

Issues

#1 Implementation issues encompass not only technology but also the lists of items to be included in the GST. The GST purportedly leaves out staples such as alcohol, petroleum, real estate, and there may be a separate higher levy on luxury items, which seems downright farcical! That’s right: let’s leave these utterly common items such as petrol and housing out, and then call it a unified tax structure.

Moreover, if replacing 17 complicated state and federal levies with consolidated agencies at 3 levels (CGST, IGST, SGST) sounds complicated, it must be terribly more so to actually administer the system procedurally and technically. By April, 2017? And pigs can fly.

#2 The tax rate hasn’t been decided yet. If it is too low, the states will attempt to block the bill and legal ramifications could be very messy. If it is too high, the popular appeal of the GST will be lost entirely. Modiji’s BJP has to walk the tightrope with finesse – which cannot be taken for granted.

#3 Revenue-neutrality could scupper the longer-term benefits. If August 3rd was any indicator, political parties across the spectrum are willing to appease and to be appeased, except the AIADMK (the ruling party of Tamil Nadu, which stands to lose out as a primarily manufacturing state), but on the major condition that revenue neutrality be assured. Granted that satisfying a few tax authorities is easier than satisfying many, but without a meaningful reduction in the tax burden, this seems analogous to dealing with 3 kidnappers instead of 17, without any reduction in the ransom amount! And the 17 kidnappers are still there, enjoying the spoils with the first 3!

Take it to the limit

The issues discussed above aside, the whole objective of the GST is voided if the state-level infrastructure of taxation authorities is not dismantled. After all, what economic efficiency will we talk about if the overall federal level tax collection is unchanged and all these taxation authorities are preserved, still making a living off Indian businesses as earlier? Then, all the GST is, is calling for more bureaucracy at the center by concentrating taxation power, which until now, was dissipated among various states. To study the other extreme, if all the taxation power at the state level is demolished, the objective of revenue-neutrality will have been dealt with, implementation issues will be minimized, and there will be no tax rate to debate over! That is what a real tax reform should look like.

Oddly enough, the National Retail Federation (NRF) did not choose to build on its 2014 ruse that Thanksgiving sales, which were down 11%, were disappointing because there is an “evolutionary change” of online shopping. If anything, this theme would have found stronger support in the media this year, with Amazon sales growing by 23% in Q3 and a MasterCard research citing holiday season online sales growth of 20%. Never mind the fact that online sales only account for a tiny portion of total retail sales.

However, better sense prevailed. The NRF did admit, to a large degree, that the U.S. Retail sector has been weak. And don’t be fooled: despite U.S. holiday sales (sales in November and December excluding autos, gas and restaurants) growing by 4.1% in 2014 and an estimated 3.7% in 2015, the consumer is under pressure.

The NRF, in fact, went on to highlight in this article that although general retail prices were 2.9% lower in October than a year earlier, as per the U.S. BEA, rent, healthcare costs and even the amount spent on communications like smartphones, tablets and broadband Internet service had all increased. Much of the extra money freed up by lower gasoline prices would have plausibly gone to such higher costs and travel and restaurants rather than retail merchandise. In other words, the consumer is feeling the pain pretty much everywhere, leaving little room for discretionary expenditures to grow.

“All of this has combined to create a very deflationary atmosphere the past year or more, meaning retailers have needed to be competitive and drop prices to keep products moving off the shelves.”

U.S. RETAIL SALES GOING A-O-L

Retail Sales in the U.S. increased 1.40% in November of 2015 over the same month in the previous year. The figures have been on a downward trajectory of late and missing forecasts significantly and consistently (Source: tradingeconomics.com).

From the NRF’s perspective, Retail sales for November — excluding automobiles, gasoline and restaurants — were up 3% from a year ago, also below its expectations.

Readers may be astonished to know the strength of this weakness – the October U.S. Census Retail Inventory to Sales ratio was at the highest point since 2008 at 1.57. This means that the retail industry, on an aggregate, was overstocked by an astounding 57% in the month of December. Even more distressing is that the ratio is well spread throughout sectors – Clothing & Departmental Stores have inventory worth close to 3x the revenue they are generating. Motor vehicles, home appliances, building materials and general merchandise have on an average 1.86x the inventory than sales. Also, looking at historical trends, this ratio usually drops sharply m-o-m in December, but then picks back up again in January to beyond levels seen in October.

The pain, thus, is likely to intensify for corporations in a soft growth environment, in the March-2016 quarter.

DEAR U.S. CORPORATE PROFITS, PLEASE WATCH OUT

U.S. corporate profits decreased by 1.7% to USD 1508.90 Billion in the third quarter of 2015 from USD 1533.90 Billion in the second quarter of 2015. Moreover, comparing retails sales y-o-y growth of 1.7% to CPI rise of 0.20% y-o-y and wage growth rate of 4.3% y-o-y in October 2015, corporations are clearly troubled. (Salaries as a percentage of operating expense varies from 18% in retail/wholesale trade to 52% in health care services. Source: Society for Human Resource Management). If one were to consider Shadow Government Statistics’ 1990-based CPI figure of close to 4%, coupled with the wage growth of also in the region of 4%, one can see that the retail sales did not rise enough to offset the increase in costs for the corporations.

Yet, our Christmas isn’t complete without that little twist in the headline by the NRF: “Consumers Win as Retailers Cut Holiday Prices”! It’s alright, because despite bad news for retailers (the very group that NRF represents) who are having to slash prices, it is good news for the customers “in the long term”. Gotcha!